Reshoring 2.0, the Mexican way
The 'maquiladora' operations in Mexico stand to benefit from bringing new manufacturing facilities in from the US today, from overseas (mainly from China) very soon
Trusted by US firms, this production model operates the equipment, tooling, and processes relocated by the foreign company under contract manufacturing agreements - importing on a duty- or tariff- free basis the components to be engineered and assembled for re-export
Maquiladoras have operated in Mexico on behalf of US (and international) firms since the late 1950's - manufacturing in exactly the same way and to the same standards as the foreign company
As trade relations between America and China come under increasing strain, the model is gaining a new, probably much larger, lease on life ...
As China grows confident with the practice, just wait and see Chinese goods 'made in Mexico' coming ...
US goods imports from Mexico are on a roll
After a dip in 2020, year the USMCA free trade agreement was introduced under the Trump administration, growth has been relentless (+18% each year in 2021/2020 and in 2022/2021)
In 2023, after a strong January -July (imports topping $240 billion), imports will easily exceed $500 billion over the full year (from $485 billion in 2022)
To worsen the outlook from an American perspective, exports from the US of unfinished product (such as car parts expedited for assembly in Mexico) will not grow at similar rates if, as seems likely, Chinese manufacturers will be the ones shipping unfinished product to Mexico or, more significantly still, manufacturing on Mexican soil before expediting engineered fabrications on to the US...
Putting US goods imports from China in the shade
China's exports to the US ($500 billion in 2021 and $536 billion in 2022) are actually expected to fall a sliver below Mexican exports at $239 billion in the first half of 2023
While America's 'reshoring' has been subject to extensive comment in the media, and significant as it may be on its own, the trend matters less than China's growing exports to Mexico
Such Chinese exports increase by 50% in 2021 (from $45 billion the previous year) as the trade war with the US heated up, growing to $77.5 billion in 2022 (+15%)
2023 is likely to be another banner year with exports of $55 billion in the first semester, putting another 50% increase within reach
Calling for an overhaul of US trade tactics
With such growth rate projections, China can realistically expect to substitute half their current direct exports to the US (under $500 billion) by manufactured products out of Mexico in 2025/2026
To make matters worse from an American trade and employment perspective, the US car manufacturers wil be induced by the United Auto Workers strikes to transfer ever more production to Mexico
As it happens, the global dominance of Chinese battery manufacturers almost guarantees explosive growth of EV assembly lines in Mexico, built with Chinese components and intricate technological transfers to stick to Regional Economic Content rules (75% value generated within the USMCA free trade zone)
The Mexican automotive industry - Tesla leading from the front
As of October 2023, Tesla
The projected assembly hub is sending shock waves throughout the region, as reported on Rest of the World
- Tesla’s suppliers are anticipating higher production at existing facilities in the area, or building new ones. AGP Group, a windscreen and panoramic roof supplier, announced it is investing $800 million in Santa Catarina. Noah Itech, another Tesla supplier, is constructing a new plant in the town, an investment worth $100 million. During a trip to Taiwan and South Korea in May, García, the governor, announced that Quanta Computer, an electronics manufacturer, was also expanding operations in Nuevo León with an investment of $1 billion, and teased investments from other Tesla providers like Foxconn and Delta Electronics.
According to a Electrive.com article (Sept. 29), Tesla told its Chinese suppliers that "if they fail to get local production up and running in Mexico by 2025, it will not only be difficult to get a Giga Mexico order in the future but orders for other Tesla plants could also be lost"
These major developments are not lost on BYD
Under the cloud of geopolitical US-China tension, caution regarding the firm's approach of the American market is further warranted by the complexity of the distribution networks BYD will need to set up...while Tesla is racing ahead
However, as Tesla signalled by doubling its planned manufacturing facility in Mexico, there is little time to waste, if the investments of all the major automotive firms, from BMW to Volkswagen, Continental and Stellantis, all come to fruition by 2026/2027 - nor should the planned (not yet confirmed) local production by Chinese SAIC and battery giant CATL (in Ciudad Juárez, Chihuahua state) be ignored
Setting a high bar for Mexico's authorities
Mexico appears to be first in line to reap the immense benefits of the American "reshoring" - if the automotive industry is a model to go by...
...that is, provided the equally immense challenges in workforce education and infrastructure can be met,
...provided natural water resources can be managed to balance residential and industrial requirements (and in Santa Catarina, that may not be the case),
...provided housing can remain affordable in the regions benefitting from automotive largesse (instead of pricing the locals out of their homes....)
Benefits for US based manufacturers might be less forthcoming and end in disappoint...the jury is out...
To sidestep failure of its China trade strategy, the Biden Administration needs to signal what exactly it wants to achieve and how the Mexican industrial expansion next door will be managed
Muddled US tactics on tariffs, sanction regimes and control over foreign investments have had their day
What is next ?